FBR tightens tax rules to push digital payments, formal trade

ISLAMABAD: The Federal Board of Revenue (FBR) has introduced stricter rules to encourage digital payments and formalise the economy.

Under the new policy, 50 percent of a business’s related expenses will be disallowed for tax purposes if a sale worth Rs200,000 or more is made on a single invoice and the payment is not received through a bank or digital channel.

The change is part of the Finance Act, 2025, and was detailed in an income tax circular issued on Monday.

According to the circular, a new clause (s) has been added to Section 21 of the Income Tax Ordinance, 2001. It states that for large cash sales that do not go through official payment channels, businesses will lose half the benefit of related tax deductions.

However, if the buyer deposits cash directly into the seller’s bank account, the transaction will still be considered as routed through the banking system and no penalty will apply.

Another important change has been made through clause (q) of Section 2L. Now, 10 percent of business expenses linked to purchases from suppliers who do not hold a National Tax Number (NTN) will be disallowed. The goal is to give the formal sector an edge over the informal economy. This rule does not apply to agricultural produce, unless it is sold by middlemen.

The FBR has also given itself the authority to exempt certain categories of taxpayers from this rule, subject to conditions it may set.

In addition, the Finance Act, 2025 introduces a restriction on depreciation claims. Under the amended Section 22 of the Ordinance, a business will not be allowed to claim depreciation on capital assets if the required tax was not withheld while making payments under Sections 152 or 153. In such cases, the unpaid amount will not be included in the asset’s cost when calculating depreciation for tax purposes.

These measures are aimed at tightening compliance, boosting the digital economy, and reducing undocumented transactions.

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